Orientation preparing and organizing yourself for

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Unformatted text preview: ody is growing to keep their costs down, then there’s constantly a great deal of capacity in the market,’ Mr. Crandall said. ‘So long as there’s lots of capacity, people have an incentive to cut prices’” (The New York Times, December 9, 2003). Orientation Preparing and Organizing Yourself for Success in College In the case of firms with low operating leverage, such as grocery chains, the profit margins are small, so firms do what they can to improve those margins—even small savings translate to large improvements in profits. In the case of firms with high operating leverage, such as airlines, each additional unit (seat-mile) sold provides a large contribution to profit, so the emphasis is on increasing volume. S Note that although these firms have the same sales revenue and operating profit, they have different cost structures. Lo-Lev Company’s cost structure is dominated by variable costs with a lower contribution margin ratio of .25. Every dollar of sales contributes $.25 toward fixed costs and profit. Hi-Lev Company’s cost structure is dominated by fixed costs with a higher contribution margin of .75. Every dollar of sales contributes $.75 CHAPTERS IN PART ONE toward fixed costs and profit. Suppose that both companies experience a 10 percent increase in sales. Lo-Lev Company’s profit increases by $25,000 ($.25 $100,000), and Hi-Lev Company’s profit in1 Making Yourself Successful in College creases by $75,000 ($.75 $100,000). Of course, if sales decline, the fall in Hi-Lev’s profits is much greater than the fall in Lo-Lev’s profits. In general, companies with lower 2 market demands than Reading and fixed costs have the ability to be more flexible to changes in Approaching Collegedo Developing companies with higher fixed costs and are better able to survive tough times.a College-Level Vocabulary Margin of Safety 3 Approaching College Assignments: The margin of safety is the excess of projected (or actual) salesReading break-even sales Following Directions over the Textbooks and margin of safety level. This tells managers the margin between current sales and the break-even point. In The excess of projected or a sense, margin of safety indicates the risk of losing money that a company faces, that is, actual sales over the breakthe amount by which sales can fall before the company is in the loss area. The margin of even volume. safety formula is Sales volume Break-even sales volume Margin of safety If U-Develop sells 8,000 prints and its break-even volume is 6,250, then its margin of safety is Sales Breakeven 8,000 6,250 1,750 prints Sales volume could drop by 1,750 prints per month before it incurs a loss, all other things held constant. In practice, the margin of safety also may be expressed in sales dollars or as a percent of current sales. The excess of the projected or actual sales volume expressed as a percentage of the break-even volume is the margin of safety percentage. If U-Develop sells 8,000 prints and the break-even volume is 6,250 prints, the margin of safety percentage is 22 percent ( 1,750 8,000)....
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